Recent New Jersey Insurance Decisions

When will it end is a refrain that must be on many liability insurers’ minds when it comes to liability under commercial general liability policies issued decades ago. Many such policies contain anti-assignment clauses, the purpose of which is to allow an insurer to limit its liability to successor companies and better gauge its potential future liability. In Givaudan Fragrances Corp. v. Aetna Cas. & Sur. Co., 442 N.J. 28 (2015), however, the New Jersey Supreme Court held that an anti-assignment clause in an insurance policy is no bar to the post-loss assignment of an insurance claim.

Givaudan dealt with the issue of the assignment of claims under decades-old insurance policies. The Court held that “once an insured loss has occurred, an anti-assignment clause in an occurrence policy may not provide a basis for an insurer’s declination of coverage based on the insured’s assignment of the right to invoke policy coverage for that loss.” The reasoning behind this rule is that liability under an occurrence-based policy attaches once the occurrence takes place even though no claim has been asserted. Thus, the insurer becomes obligated to the insured on the date of the loss and that obligation may freely be assigned.

Recently, the Appellate Division reached a similar conclusion in Cooper, LLC v. Columbia Cas. Co., 2018 WL 1770260 (April 13, 2018). The real issue in Cooper, however, was not whether the claims could be assigned, but rather whether they had, in fact, been assigned. That case involved coverage for environmental damage under multiple policies that were in effect during the period from 1971 through 1980. The policies had been issued to McGraw-Edison Company. The plaintiff, Cooper, was named as a potentially responsible party at a hazardous waste site that had been owned by McGraw-Edison. As the successor in interest to McGraw-Edison, Cooper sought coverage under the McGraw-Edison policies.

The Corporate Restructuring

In May 1985, McGraw-Edison, which the court refers to as Old McGraw, was acquired by Cooper. A series of complex transactions concerning the business operations, assets, and liabilities of Old McGraw then took place.

First, Old McGraw’s business operations were divided among ten “Mirror Image Companies.” The Mirror Image Companies owned an acquisition company named CI Acquisition. CI Acquisition, in turn, owned another acquisition company named CM Mergerco. Neither acquisition company owned any operating assets.

On May 30, 1986, Old McGraw and CI Acquisition merged. As part of the merger, CI Acquisition assumed all of Old McGraw’s obligations and liabilities. The merger agreement stated that “all the property, rights … and other assets of [every] kind and description” were being transferred from Old McGraw to CI Acquisition. Although the agreement makes no refence to insurance policies or claims, the appellant-insurers did not dispute that Old McGraw’s rights under its insurance policies were transferred to CI Acquisitions.

Five minutes after the merger took place, five of the Mirror Image Companies were merged together to form McGraw-Edison Company, which the court refers to as New McGraw. CI Acquisition then distributed all its assets (which just minutes ago had been owned by Old McGraw) to New McGraw and the remaining Mirror Image Companies. The transfer of assets took place by way of bills of sale. In the New McGraw bill of sale, CI Acquisitions transferred “all of [its] assets, rights and projects of every kind and nature … used in or related to all operations other than its Power Systems, Controls, Clark and Service operations.” Once again, the agreement made no reference to insurance policies or claims. It did indicate, however, that New McGraw assumed all of CI Acquisition’s liabilities. After the transfer of assets, CI Acquisition, which only held the assets for a matter of minutes, was liquidated.

Over the next eighteen years, Cooper owned New McGraw and the remaining Mirror Image Companies. In November 2004, Cooper merged New McGraw into itself.

Transfer of the Insurance Rights

There was no dispute that if the insurance rights had been transferred to New McGraw as part of the 1986 bill of sale, they would have been transferred to Cooper as part of the 2004 merger. Thus, the bill of sale between CI Acquisitions and New McGraw was the critical document. The bills of sale purportedly transferred various rights to New McGraw and the surviving Mirror Image Companies, but the specific rights that were transferred to each company were never identified.

As noted by the court, “in interpreting the 1986 Bill of Sale between CI Acquisition and New McGraw, the analysis boils down to whether the language alone clearly provided for the transfer of the insurance rights, and, if so, which entity received those rights.” Id. at *4. The court found the language in the bill of sale (“all … assets, rights and properties of every kind and nature”) was sufficient to transfer any insurance rights. The dispositive question, however, was whether those rights were transferred to New McGraw or one of the Mirror Image Companies.

Because the bill of sale was not clear with respect to that issue, the court relied on the deposition testimony of several witnesses. One witness was the general counsel of Cooper, who previously worked in the law department. She testified that the bill of sale was intended to transfer all of the assets and liabilities of Old McGraw, which had been acquired by CI Acquisitions, to New McGraw. She further testified that the Mirror Image Companies did not receive any new rights through the asset sales and that they had no interest in the insurance rights. However, she did not participate in the drafting of the bill of sale, although she had general knowledge concerning Cooper’s business operations.

The other two witnesses worked in Cooper’s risk management and insurance department. Although neither individual was involved in the 1986 asset sale, they claimed to have knowledge of Cooper’s business operations prior to and after the sale. In addition, and more significantly, they had knowledge concerning Cooper’s dealings with Old McGraw’s insurers. Significantly, they testified that Cooper had made retroactive premium payments to the insurers and had submitted claims under the policies, which were, in fact, paid by the insurers. There also was documentary evidence supporting this testimony.

While general knowledge about Cooper’s business practices arguably has questionable relevance on the issue of the parties’ intent, the fact that the insurers treated Cooper as having rights under the policies directly supported the argument that Old McGraw’s rights under the policies had been transferred to Cooper.

Notably, even though Cooper’s general counsel had no personal knowledge concerning the intent of the drafters of the bills of sale, the court credited her testimony because she was designated as the corporate designee. According to the court:

Under N.J.R.E. 602, witnesses may not testify to a matter unless they have personal knowledge of it. One exception to that requirement is set forth in Rule 4:14-2, which provides that a party may depose a corporation, and the corporation must designate one or more persons to testify on its behalf. These corporate witnesses may then testify “as to matters known or reasonably available to the organization,” even if these matters are outside the witness’ personal knowledge.

Id. at *5. While the court’s recitation of the rules is correct, the corporate designee must still have a basis for his or her testimony. That is something that seemed to be lacking in this case in that no reference was made to the source of the information about which the witness testified.

Conclusion

In light of the Givaudan decision, the Appellate Division’s ruling in Cooper that the insurance rights could be transferred is not surprising. Because liability for environmental contamination attached at the time the contamination occurred, which in this case was in the 1970s and early 1980s, there was no question that any potential right to assert a claim arose long before the transfer of Old McGraw’s rights under the policies.

What the case shows is how difficult it is to predict when an insurer’s potential liability will end. It does not appear that insurance coverage was on the mind of Cooper when it undertook the series of transactions that ultimately resulted in it being named as a potentially responsible party at a hazardous waste site 23 years later. Unfortunately for the insurers, their acceptance of premiums and payment of claims under policies issued decades earlier undercut their argument that Cooper had no rights under the policies.